Options and Threats

Last week, I distributed a column reviewing the financial and accounting tricks that have played such a major role in recently erasing some seven trillion dollars of value from our capital markets. This piece generated a great deal of response, most of it very favorable and crossing all ideological lines.

Among other reactions, an editor at the Los Angeles Times suggested that I modify and expand the portion of my missive concerning options accounting for publication in their Sunday paper, which I am attaching below.

One exception to this agreement was a rather stubborn individual who, with absolutely no background in finance or accounting, repeatedly argued that options were indeed not an expense because no actual cash changed hands. Presumably, she should therefore find my suggestions in the piece below piece an excellent and practical proposal for eliminating all business costs in America, and thereby making the author of “Dow 36,000” look like a mere piker.

If she chooses to promote these financial ideas, I freely assign her all my future rights to a Nobel Prize in Economics for this remarkable discovery.

Furthermore, the absolutely mysterious determination of our political leaders against allowing regulatory agencies such as FASB and the SEC to require options expensing has also become somewhat less absolutely mysterious.

Around the same time I distributed my comments, I also published a letter along similar lines in the Wall Street Journal. This letter immediately led a senior financial executive at one of Silicon Valley’s larger companies to track me down and send a harsh note in response, virtually denouncing me as a traitor to his industry and containing clear threats against my personal livelihood.

If a mere letter to the editor from a private citizen could provoke this sort of reaction from a major corporation, one could only guess at the likely reaction to fundraising pleas from an elected official who gave the slightest hint of wavering on the options issue. I attach the correspondence below.

Also, my suggestion that America’s corporations could radically improve their profit-and-loss statement by simply eliminating all cash salaries and providing all compensation in the form of non- expensed options appears much closer to actual reality than I’d ever imagined.

Just a few days after writing my column, I learned that the billionaire CEO of once-highflying chip-maker Broadcom had been quoted as saying that he deliberately paid his engineers salaries so low that they had to sell stock just to pay their ordinary living expenses. Need we be surprised that the gentleman in question has also appeared on the cover of the latest issue of Fortune Magazine as number two on their list of the greediest corporate executives in America? Among other notable achievements, he quietly sold $799 million of stock in his own company, stock that has now dropped 95% from its peak value.

Finally, the front page of this morning’s San Francisco Chronicle business section carried an interesting column recounting the practical and useful purposes on which Silicon Valley CEOs are spending their options-based windfalls, while their companies plan massive employee layoffs in the current downturn.